Why Credit Cards Might Not Be Evil
No other personal finance tool gets as much negative press as credit cards. Because of record high credit card debt and less-than-honest practices by card companies, most people have the impression that, while they might be a necessary part of your wallet, these small rectangular pieces of plastic are basically evil.
While they are obviously not the ultimate tool for free-spending consumers, Visa, MasterCard and their peers are not completely without merit. Of course, there is the one really well-known positive aspect of credit cards: regular, well-managed use can increase your credit score and make it easier to get loans at low interest rates (for college, for a house, a car, or even a new business).
Many cards also come with rewards (usually paid in airlines miles or cash-back bonuses) and other perks. Though most companies tout their product’s rewards-earning potential, many of the more useful perks, especially for casual card-users, are buried in the fine print. People who are confident in their debt avoidance abilities are in a good position to enjoy these perks without having to pay anything extra.
But how to avoid the debt traps that seem to catch so many people? The best approach is to simply use your credit card like cash (or like a debit card). You can enter your bank account information on your card’s online account management site and then simply log on to pay off any purchases within a few hours, days or weeks of making them. As long as the entire balance is paid off by the due date each month, there is absolutely no need to worry about debt or even about interest rates and hidden fees. With this fundamental debt avoidance strategy in hand, you can start focusing on rewards and perks instead of simply trying to avoid the abyss of high interest rates and minimum monthly payments.
Virtually every credit card on the market has a rewards program. The key to unlocking big-time bonuses is to choose the correct card for your spending habits and then spending enough so that you earn more than a few dollars in rewards by the end of the year.
Basic rewards cards offer an rewards earning ratio of one point (or one frequent flier mile) per dollar spent. That means spending $25,000 per year to get the 25,000 points usually required to earn a free airplane ticket (or hotel room, etc) worth about $250. However, some niche cards offer a higher rewards points per dollar ratio for purchases made in certain categories. Some go as high as 5 points per dollar spent (on travel related purchases, for example). The differences can be huge: with 5 points per dollar, you will only have to spend $5,000 to get your $250 worth of rewards instead of the seemingly unreachable $25,000.
Super savvy credit card users can get even better rewards by shopping for credit cards that offer introductory bonus offers. Some cards offer bonuses for new users who spend a certain amount within the first few months that they own their card. The deal could be something like: spend $3,000 in the first three months and earn 30,000 bonus points. That’s $300 worth of rewards in a few months. Serious points collectors jump from card to card, taking advantage of these offers. Of course, being too ambitious with bonus hunting has a serious drawback: if you open and close too many accounts and are constantly applying for new credit, your credit score will suffer. But applying for a new card or two each year shouldn’t hurt too much as long as your other finances are in order.
Let’s face it, these rewards seem sexy at first glance, but the big picture might not feel so good: whatever card you choose, you’ll most likely be counting your rewards in the hundreds of dollars per year. Not a huge amount of profit. But you can take a different mindset for non-niche, cash-back cards. Discover Cards are known for their cash-back rewards, as are other well-publicized cards like the Capital One Venture Card. The Venture offers 2% cash-back per dollar spent on every purchase, regardless of which category it falls into. That is like getting a dollar for only $0.98. It’s not going to make you wealthy, but it beats paying full price for everything. Perhaps you could think of it as having a coupon in your pocket that allows you to get discounts without the embarrassment of whipping out a paper coupon at the cashier.
For many casual users who aren’t going to put thousands of dollars per year on their card, the real reason to use plastic is to take advantage of some of the lesser known perks. Some credit cards offer purchase protection, which is basically a form of insurance for new purchases. If your purchase is broken or if you have trouble returning it, the credit card company can either reimburse you for your purchase or act on your behalf to get the store to accept your return. Credit card companies can also step up when it comes to identity theft and fraud. They are better at dealing with fraud than banks (which issue debit cards). You can think of it this way: you haven’t actually lost any money until you pay your credit card bill. This means that there is a buffer between you the person someone who stole your card or your number. They don’t have access to your bank account like they would if they stole your debit card.
Perhaps you don’t want to collect miles, but would like to earn other perks from a rewards card. There are options such as free checked baggage, access to airline lounges, and being first in line for upgrades that are associated with certain high-end travel rewards cards. Airline specific cards and cards like the American Express Platinum are good for these kind of non-points-related perks. Often, it is these perks that make the deal worthwhile: as long as you earn enough rewards to cover any annual fees associated with the card, these extras are completely free.
Using credit cards requires a decent amount of personal finance savvy, but the rewards and perks can make this effort worthwhile, even if you are a casual credit card user who doesn’t whip out the plastic every time that you go shopping.
About Josh Lew Josh Lew lives in the Midwestern US when he is not traveling. He is a columnist for Gadling and has contributed to Hackwriters and Skive Magazine.